Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For its services, the company has always charged a flat fee per hundred square feet of carpet cleaned. The current fee is $23.15 per hundred square feet. However, there is some question about whether the company is actually making any money on jobs for some customers—particularly those located on remote ranches that require considerable travel time. The owner’s daughter, home for the summer from college, has suggested investigating this question using activity-based costing. After some discussion, she designed a simple system consisting of four activity cost pools. The activity cost pools and their activity measures appear below: Activity Cost Pool Activity Measure Activity for the Year Cleaning carpets Square feet cleaned (00s) 15,000 hundred square feet Travel to jobs Miles driven 184,000 miles Job support Number of jobs 1,800 jobs Other (organization-sustaining costs and idle capacity costs) None Not applicable The total cost of operating the company for the year is $358,000 which includes the following costs: Wages $ 141,000 Cleaning supplies 31,000 Cleaning equipment depreciation 12,000 Vehicle expenses 38,000 Office expenses 57,000 President’s compensation 79,000 Total cost $ 358,000 Resource consumption is distributed across the activities as follows: Distribution of Resource Consumption Across Activities Cleaning Carpets Travel to Jobs Job Support Other Total Wages 75 % 12 % 0 % 13 % 100 % Cleaning supplies 100 % 0 % 0 % 0 % 100 % Cleaning equipment depreciation 74 % 0 % 0 % 26 % 100 % Vehicle expenses 0 % 75 % 0 % 25 % 100 % Office expenses 0 % 0 % 63 % 37 % 100 % President’s compensation 0 % 0 % 34 % 66 % 100 % Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on. Required: 1. Prepare the first-stage allocation of costs to the activity cost pools. 2. Compute the activity rates for the activity cost pools. 3. The company recently completed a 600 square foot carpet-cleaning job at the Flying N Ranch—a 51-mile round-trip journey from the company’s offices in Bozeman. Compute the cost of this job using the activity-based costing system. 4. The revenue from the Flying N Ranch was $138.90 (600 square feet @ $23.15 per hundred square feet). Calculate the customer margin earned on this job.

Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For its services, the company has always charged a flat fee per hundred square feet of carpet cleaned. The current fee is $23.15 per hundred square feet. However, there is some question about whether the company is actually making any money on jobs for some customers—particularly those located on remote ranches that require considerable travel time. The owner’s daughter, home for the summer from college, has suggested investigating this question using activity-based costing. After some discussion, she designed a simple system consisting of four activity cost pools. The activity cost pools and their activity measures appear below: Activity Cost Pool Activity Measure Activity for the Year Cleaning carpets Square feet cleaned (00s) 15,000 hundred square feet Travel to jobs Miles driven 184,000 miles Job support Number of jobs 1,800 jobs Other (organization-sustaining costs and idle capacity costs) None Not applicable The total cost of operating the company for the year is $358,000 which includes the following costs: Wages $ 141,000 Cleaning supplies 31,000 Cleaning equipment depreciation 12,000 Vehicle expenses 38,000 Office expenses 57,000 President’s compensation 79,000 Total cost $ 358,000 Resource consumption is distributed across the activities as follows: Distribution of Resource Consumption Across Activities Cleaning Carpets Travel to Jobs Job Support Other Total Wages 75 % 12 % 0 % 13 % 100 % Cleaning supplies 100 % 0 % 0 % 0 % 100 % Cleaning equipment depreciation 74 % 0 % 0 % 26 % 100 % Vehicle expenses 0 % 75 % 0 % 25 % 100 % Office expenses 0 % 0 % 63 % 37 % 100 % President’s compensation 0 % 0 % 34 % 66 % 100 % Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on. Required: 1. Prepare the first-stage allocation of costs to the activity cost pools. 2. Compute the activity rates for the activity cost pools. 3. The company recently completed a 600 square foot carpet-cleaning job at the Flying N Ranch—a 51-mile round-trip journey from the company’s offices in Bozeman. Compute the cost of this job using the activity-based costing system. 4. The revenue from the Flying N Ranch was $138.90 (600 square feet @ $23.15 per hundred square feet). Calculate the customer margin earned on this job.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Activity Cost Pool	Activity Measure	Activity for the Year
Cleaning carpets	Square feet cleaned (00s)	15,000	hundred square feet
Travel to jobs	Miles driven	184,000	miles
Job support	Number of jobs	1,800	jobs
Other (organization-sustaining costs and idle capacity costs)	None	Not applicable

The total cost of operating the company for the year is $358,000 which includes the following costs:


Wages	$	141,000
Cleaning supplies		31,000
Cleaning equipment depreciation		12,000
Vehicle expenses		38,000
Office expenses		57,000
President’s compensation		79,000
Total cost	$	358,000

Resource consumption is distributed across the activities as follows:

Distribution of Resource Consumption Across Activities
	Cleaning Carpets	Travel to Jobs	Job Support	Other	Total
Wages	75	%	12	%	0	%	13	%	100	%
Cleaning supplies	100	%	0	%	0	%	0	%	100	%
Cleaning equipment depreciation	74	%	0	%	0	%	26	%	100	%
Vehicle expenses	0	%	75	%	0	%	25	%	100	%
Office expenses	0	%	0	%	63	%	37	%	100	%
President’s compensation	0	%	0	%	34	%	66	%	100	%

Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on.

Required:

1. Prepare the first-stage allocation of costs to the activity cost pools.

2. Compute the activity rates for the activity cost pools.

3. The company recently completed a 600 square foot carpet-cleaning job at the Flying N Ranch—a 51-mile round-trip journey from the company’s offices in Bozeman. Compute the cost of this job using the activity-based costing system.

4. The revenue from the Flying N Ranch was $138.90 (600 square feet @ $23.15 per hundred square feet). Calculate the customer margin earned on this job.

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